Earnings Call: Q2 2021

Jul 12, 2021

Hello, and welcome to Biblovar's Festiener AB Q2 Report 2021. Today, I'm pleased to present Avel Lieber, CFO and Ulrika Helentlein, CEO. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. I'll now hand over to the speakers. Please begin. Thank you. So welcome to the presentation of Edvard's first half twenty twenty one. We start with a summary. We have seen a higher activity in the market, especially since March. And we have been able to sign leases for SEK 86,000,000 during Q2, which is a high level, especially since that number is the sum of many new leases. I would say that, that is also a sign that the activity is high in many sectors. Rent levels continue to develop in a positive direction, not at a high speed, but still in the right direction. We are still affected by our large divestment from December and still a bit high on vacancy but improving. Earnings in relation to debt remained strong And our solid balance sheet and liquidity position means that we also are ready for investment possibilities. I'm really proud of our organization. We really have been focusing on preparation for the period after the pandemic. And now when we see opportunities, we are totally prepared to take advantage of that. We are ready for business. Continue to Page 3 with a summary of figures for the first half twenty twenty one. Rental income is affected by divestments as mentioned, but also some currency effects that continued also during Q2. The income summarized to EUR 1,477,000,000, the operating surplus to EUR 1,046,000,000 And income from property management amounts to €859,000,000 The net amount. The net result amounts to SEK 1,700,000,000 which corresponds to SEK 6.55 per share and EPRA NRV increased to $154,480,000 or by 5% adjusted for dividend. Page 4. We have had a high level of new leases, SEK 86,000,000 in the quarter and SEK 142,000,000 for the period, a net vesting of €36,000,000 for Q2 €45,000,000 for the period. And important to note, We have higher rents in the new leases than in terminations. We announced the new lease to a governmental tenant in Lund last week, And it's worth mentioning that that lease was signed in July after the end of the second quarter. We see it as potential that the activity of the last This quarter will continue. Of course, a bit of a slowdown now a few weeks in the summer, but we have several good discussions in all our cities. And of course, we will see terminations as well during this period, but terminations can also give new opportunities as long as we are active and are close to our customers. The net netting in historical perspective at Page 5, positive figures for the last 25 quarters, and that's not a guarantee that we will never be below 0. But overall, we have a good stability in our market. Lessing in light blue and terminations in large, the Black Line is the best listing. Page 6 on the list of our large tenant largest tenants. The rental income from public tenants continues to be high, 24%. But as I also say, every quarter is the wide diversity across many sectors in our region. That is the strength that brings stability. Page 7. Rest of value is €3,287,000,000 per year and rest of income, euros 2,000,000,000 €968,000,000 after our divestment. And looking at the like for like figures, we can see that the rental value is just slightly up plus 0.3%. But this will continue up as long as tenants have new needs, and that is exactly what's happening right now. The rental income is affected by higher vacancies than last year, but we already can see improvements here as well. Page 8, a summary of our office portfolio. The market value is €39,224,000,000 and overall the The rate is 91%. When our new tenants move in, for example, in Terminal 1 and Ursula 1 enhancing VoIP, these figures will improve? And the operating sales platform offices summarize to SEK1.881 billion and a running yield of 4.8%. Page 9. The demand for logistics and production continues, and here the occupancy is very high, especially in Malmo at almost impossible 97%, temporarily down in Helsingborg and 92% occupancy rate at the home. With a running yield of 6.5 percent and a total value of 5,998,000,000 Demand continues to be strong throughout this sector in all our cities. And for the entire property stock, Page 10, The occupancy rate is 91%, excluding fixed projects and land and at operating surplus of EUR 2,272,000,000, which gives us a running yield of 5% excluding fixed unmet. Page 11, Changes in market value of our portfolio. We started the year with €6,720,000,000 in accordance with our external valuation, which we do once a year with 100% of the stock at the same time. We have made acquisitions for €102,000,000 We have invested €453,000,000 We have changes in valuations of €284,000,000 half come from new leases and half from lower yields in some properties, for example, Hermes in Helsinki World. Together with the currency translation of SEK 65,000,000 that summarizes property value of for SEK 7,000,000,000 and SEK 56,000,000. Page 12. Even though the property value has increased at slower pace during 2020 and so far in 2021 due to our large industrial divestment in 2020. The total value is still moving upwards, but there is more to come while we continue our investments, of course. A catalog of our value of properties in our 4 cities on Page 13. 42% of the value is in Malmo, 23% in Hudson Yards, 17% in loans and 18% in Copenhagen. These cities belong to the same region, but they also have differences that contribute and interact with the whole. All of the cities have noticed the rising number of discussions and leases since last quarter, but maybe those are a bit special. The cluster of companies working with the best engineers is growing in Lund. We have been waiting for the time when also larger areas will be attractive in Lund. And now we see that seems to be the time. As we are ready with the Raffens Tillman, for example, We have also signed leases in a new area in Lund Sainz Village, but I'll come back to that when we look at our projects. And what about the future? How will we work in the future? Page 15. Is working from home the future? We and many others have tried to figure out what is happening and how our needs will change. To be ready for change, of course, but also to be ready to help our customers to be the best possible employer. Some have noticed the high efficiency in certain types of tasks performed from home, and high efficiency is, of course, a good thing. But we also see measurements of lower creativity, larger gaps within the companies, Harder for people to cooperate and not at least a digital overload that maybe not contributes to high productivity. The time spent in meetings, sending and taking care of e mails and handling digital documents have increased massively. And I'm not sure that you do your best things in your mailbox. Page 16. We will see changes in needs and many companies will work in a more flexible way. In this situation, flexible premises will of course be an advantage. And we also see expanding demand for upgrading the work cases to be even more attractive for the employees. A common place for work will doubtless play a very important part in connecting people. That place can offer collaboration and creative environments, And the office will continue to be a place to create the culture in the company and to share and gain knowledge. And Orest Aves for more figures. Thank you very much, Ulrika. Moving on to Slide 18, looking at the income statement for the Q2. You can see that the rental income amounted to 739,000,000 Operating surplus was €577,000,000 corresponding to a surplus ratio of 73%. You should bear in mind that the operating surplus has been affected by divestments of having an effect of minus €16,000,000 and also currency effects of minus €5,000,000 in that number. Income from Property Management amounted to 443,000,000 And included in that is the financial net of SEK76 1,000,000 for the quarter. Excuse me. The change in the value of our properties was plus €210,000,000 in the quarter, And that is affected both by lower yield requirements for certain properties, but also improved expected operating surplus driven by the net lettings. We had a positive change in the value of derivatives of EUR 16,000,000 And the profit for the period amounted to €529,000,000 On the next slide, Page 19, you can see a bridge between the First half rental income in 2020 to the first half rental income 2021. And I think it's interesting to note here that divestments had a negative effect of €45,000,000 for the first half of the year. Rexel had a slight positive comparison when it came to COVID discounts. The COVID discounts 2020 in the spring was slightly larger than in 2021. We had a negative currency effect of EUR 15,000,000 and lower service income, also of course, largely driven by the pandemic and its effects of minus €18,000,000 with larger vacancies having an effect of €39,000,000 And then we have positive effects on the rental income coming from lettings from projects and from indexation of €40,000,000 And that then amounts to the €1,477,000,000 in rental income for the first half 2021. On Slide 20, you can see the balance sheet development over 12 month period. Our property value has increased by approximately €700,000,000 on a 12 month basis. And at the same time, our borrowings decreased by €1,100,000,000 and equity increased by €1,700,000,000 compared to the same period 12 months previously. Translating the balance sheet into key figures on Slide 21, You can see that our equity assets ratio now stands at 40.5% and the leverage is 49.6%, slightly higher than in Q1. But as you remember, we have, of course, paid a dividend during May of €807,000,000 Our interest coverage ratio is 6.5x, continues to be very strong. The you have a few I shared numbers at the bottom of the slide. The EPRA NRV, as Ulrika mentioned, now stands at SEK 100 at DKK54.48, which in a 12 month perspective is up 12% adjusted for the dividend paid. On Slide 22, you can see the historic development of EPRA NRV. And since 2009, the average annual growth has actually been 17% adjusted for dividends. Moving to Slide 23. You can see the historic developments of our financial ratios for which we have set different targets. Our LTV, We have a target of being at a maximum of 60%, and we're now since a few quarters below 50%. The equity assets ratio has gradually gone up and is now also over the past few quarters above 40%. And the interest coverage ratio has since beginning 2019 been at very strong levels above 6 times. On Slide 24, We have another metric, which we feel is very important to look at when you try to judge our financial position and the stability of that. Net debt in relation to EBITDA now stands at 11.1 times, And that is slightly better than the average over the past few years. But as you can see on the slide in the long term perspective, The ratio has been basically between 10 and 11 times for many years. On Slide 25, you can see the split of our sources of financing. Almost half of the financing comes from bilateral bank loans. We borrow 36% of our Loans come from the Danish mortgage loan system and 18% from the bond market, both via SFF, Sustafitsvenogene and via our own MTN program. On Slide 26, you have the details of our loan portfolio. The average interest rate in the portfolio is now 1.28 percent. And we have an average fixed interest period of 3.2 years and then average loan maturity of 6.2 years. On the next slide, Slide 27, You see the historic development of the loan maturity and the fixed interest period. And as you can see, the loan maturity has been around 6 years over the past few years actually. And the fixed interest period used to be quite high, but that is now that is many years ago. Over the past few years, we've been at between 3 4 years in average fixed interest period. Moving to Slide 28. You see the historic development of available funds That is our unutilized credit facilities plus liquid funds at each quarter end. And as Rica touched upon before, our liquidity position is strong with over SEK 3,000,000,000 Kronor in available capacity at present. So I'll end the Number crunching there and hand back the words to you, Ulrika. Thank you. So let's say a few words about sustainability. Page 30. We have been focusing for many years on investing in sustainable new properties with the highest certification levels when we invest. But of course, also improving in things that we mean really matters: reduce energy consumption, invest in solar cells and not at least to replace bad refrigerants with sustainable gases. Now we also have an efficient method for Our existing properties and we think that works very well and we continue that work in a higher speed. It's important that we all are aware of that the largest climate impact our industry has is in scope 3. And until we have figured that one out, we cannot ever be satisfied with the sustainability work that we do. So we will step up 10% on that front and give the best we can to also improve the whole industry in that part. Let's go to acquisitions and divestment. Page 32. We have only made a minor acquisition during the Q2 as we acquired now for Landry in and area. Here, we will have the opportunity to build approximately 8,000 square meters of offices. And Investments in Progress, Page 34. We have, during the first half twenty twenty one, invested EUR 463,000,000 in ongoing projects, and it remains EUR 1,486,000,000 to invest in already improved projects. Overall, the projects continue according to plan in a good way. We are well protected, especially in the larger projects against higher prices of material. We see indications of a slowdown in price increases during the autumn. And it's also an interesting fact that we actually in our market see a good correlation between construction costs and rent level. From Arce Skoda to Vans Skoda. And who knows, if the price of materials gets even more aggressive, The whole industry might use energy and engineers more, calculate more and then use less materials. So that could actually be a good thing for the climate. Page 35. Francesca, Absol Pevano V in Hillier with 16,000 square meters level floor area. It's now moving up from the ground. We have we can offer great efficiency, a warm inner core, the highest sustainable standard, both in 0 carbon dioxide footprint, environmental classification and also well classification. Lifes, the right projects, definitely. We have now signed the first leases and we have made offers for more than half of the level area. But there is a long time before this project finished in Q2 2023 and we have no other vacancy in this area. Page 36, in Channel 2, In Bafghan, we continue with our projects for the region, Council of Skouane and Maimler University. In total, we invest for EUR 237,000,000 fully leased and long leases. This will be completed in Q4 'twenty one. Page 37, at TIMSSBORGENSAVEN, we are doing a project for Electrode Beckhoff optimization, a state of North Office and a good transport location in Malvern, completion in Q3 2022. Page 38. At Surinameo, 1254, we have just completed 2 projects, And Page 39 is Raffenadelligetre in Lund. We continue with this conversion project. The old tenants have moved and preparation and planning for the billing phase continues. We have started to sign the first leases and the investment will give us 5,800 square meters modern offices with this interest rate industrial touch and right beside central station. Page 40. This is a new project. We have decided to start this project in the new area, Ayns Village in Lund. It's located just right just in the middle between the Research and Sciences MAX IV and ESS. We won this competition of land here in 2015, and now We have been redesigning this project and waiting for the right timing, and now is the time. We have signed 50% of the area with a company in the food tech sector. There will be both labs and research and offices. We have they have also asked for option for the rest of the area, but there is no decision made yet. We will invest EUR 244,000,000 and we will also have an option to buy more land in this area. I more or less lived my life up here in this area during 5 years when we built the MAX IV. And it's really satisfying that We now can continue with more investments for companies in the private sector in this area. Page 41. We have also decided to start project Pultejanet13 in Helsingborg. It will be a facility for multi tenant and logistics and we will build this project in 2 spaces. And something about the future investments. Page 4 is 3, let's call it 1 in Malvern. This is the project that we call Vista. This might be our next larger project put in production. Procurement is ongoing, and we are planning the possibility to start the 1st phase with 400 parking spaces and a great 4 tab in 2021. It's a unique opportunity to offer both group parking and direct access to the train station for both Konta-five and Zekkonet-one. Page 44, 4 possible projects in our 3 Swedish cities. Kosovo and 1 is just beside that another visit. It will provide the city center with larger areas than Santander. If I am curious, it's just beside the train station in the Indian area, Polisson 7 in Helsingborg. And a bit of The last picture is a bit of redesign of Chords Veradlingen 2015 and 2018, where we now can offer up to 22,000 square meters of cost floor area in logistics. Page 45. And Since there is some extra focus in logistics, I would like to mention a few other possibilities that we work with. We have BrowseScore 21 in Essenborg, Interesting area for a combination of office and logistics. We can both build and refurbish here approximately 20,000 square meters. This is target 1. It's also in Heti Wang, also here approximately 20,000 square meters. This is just on 5 in Nanspljola, 14,000 square meters logistic with up to 20 meters after the ceiling and just beside the highway. In Surla, where we have built the Norwegian Council of Skouane and we have built, we can add on 17,000 square meters logistics of production. So we have possibilities in all cities and in both offices and for this year. Page 46, of course, Nudhammelen. This was actually an area for logistics in the old days, but now it will be in the city center. And this picture and this land area will follow us for many years. We have just fixed this to us. Page 47, Smarikajen is one of the first possible projects there. The solar plant continues, but in a bit of a slow pace at the moment. We work in several parts of the Hamdan with toning plant. But here in Sverkardian, we will be able to produce at least 10000 to 30,000 square meters of assets in this first project. On Page 48 is Krani 1, just at the entrance to the local area from the Netherlands. And our application for planning permission is still being processed. Next slide, 49, summarize. We see high activity in the market, strong net debt. Rent level positive earnings in relation to debt is strong and we can continue to be ready for further investments. We will continue to invest, focus on our earning capacity and we will do so with continued stability. So now we're open for questions. Thank Our first question comes from the line of Erik Grenstrom from Carnegie. Please go ahead. Thank you very much. Good morning. And I have a few questions. If you perhaps To start with a comment made in the report about the vacancy rate, you state that you expect it to gradually decrease throughout in coming quarters, but that the bulk of it will happen in 2022. Could you give us some indication of what you Expect vacancy rates to be at the end of 2022 given what you already know at this point. I think we look at the vacancy rates. We're currently if you exclude Projects in land were at 91%. We were down at 90%. In the long term perspective, 93% is a high number. So I mean, we're really talking about decimals here. We would expect from the current levels That will move in the right direction as of the end of this year. But you'll see a larger effect of the deals that we're signing in 2022. I don't Want to put the specific number as a year end occupancy Because we don't give forecasts, as you well know. But moving in the right direction from the current 91%. And we will improve also during 2021. I'm sure that we but in some leases, we have to do some refurbishment first and then they move in, in early 2022 and moving on. Okay. And in terms of net netting, it was Obviously, another quarter with positive figure. But you also mentioned that new leases carry higher rents than terminated 1 or old leases. Could you tell us something about how much renegotiated rents are up on average in the portfolio? Of course, it's always tricky to compare Different services with each other, but they are up, Not in a dramatic way, but they are definitely moving in the right direction. So I would say that we I think I mentioned your last quarter and But it's not easy to compare overall because it's not the same thing in those books. But definitely, we can add on some extra quality, but we can also increase the rent levels as a base, but it's not dramatically, of course, but definitely good. Okay. But it still means that you expect like for like rental value to trend upwards going forward? Yes. Great and Okay. All right. Fair enough. Could you tell us something about your ability to acquire? You mentioned a rather small Now here in Q2, but what is the outlook for acquisitions going forward in your view? What are you seeing in the direct market? We are ready and we're looking into every possibility. But sometimes it's not so much to acquire at the moment. And we try to be continue to be careful about what we buy because we want it to be sustainable over time. But there will be possibilities, of course. And we are looking into something that can be interesting, but You never know. It's hard to give a prognosis about when you can acquire the one. Thanks. Okay. And investment volumes, they have been sort of a little bit Sluggish lately, I mean, the pandemic is obviously a reason for that. But what could you tell us about sort of the outlook for investments Projects going forward, you had a number of potential projects in the presentation. What's the time frame of those, So to speak, when do you think that those can be started? Are those 2022 projects? Or are we talking 2025? I would say that it's possible that we can start with STA in the end of 2021. And I think that a few of the other projects can be started in 2022, definitely. So I think that we have just started, full PSM and and Konscapa 1 in Lund, which will start now in the I think the production phase would start early 2022. So I think that we keep filling out the portfolio in a good way. Okay. And the activity in the rental market from your tenants, have you seen a change in The ability to sign sort of longer leases and new projects versus renegotiations of, let's say, 3 to 4 year leases. The activity is really high and they I didn't really get the question actually. Once again, Eric, please. Yes, sure. I mean, the difference in sort of if clients So tenants, potential tenants are more likely to do renegotiations of shorter contracts, meaning existing contracts for, let's say, 3 to 4 years versus the demand for actually signing new leases when you talk to tenants that are looking at maybe 5 to 10 year leases in new projects. If there's a difference there or if the increased activity basically means that all types of discussions, No matter how long the leases are, it's increasing. I would say that the it's pretty much We keep we can keep the times for the leases as before. We have, of course, more discussion on flexibility, but that is more of Can we have a part of the surface in an other type? Can we have a possibility to add on surfaces during the lease time and such. So the flexibility need can be provided in different ways. It doesn't mean that the time of the leases will be shorter. So we solved it that way. I don't feel that The tenants are afraid for the times in the leases that we want them to have. Okay. Okay, that's interesting. Thank you very much. Those were my questions today. Thank you. And the next question comes from the line of Stefan Andersen from SEB. Please go ahead. Thank you. A few questions from me then. Going back to the vacancies there, She's trying to just see your view on the market. The 9% that you have, I guess, it's fairly Equal to the market vacancy in the region. It seems like The prices are not it's not high enough to have any pressure on price. Is there a level where actually You couldn't drive rents up any longer. If you were at 12, what's your experience there? If you come down to a tight market like 4%, 5%, then 5%, 6%, then of course prices start moving up rather quickly. But what's your view on that? I would say that you have to go much lower than 90 before you can feel the pressure on the price because it's also depending on it's not on the price and It's, of course, location and quality, and you don't see that in the figures of the vacancy. So the vacancy for the overall market is included a lot of properties that maybe It's the effective the most effective ones. But I would say that the product that we offer, The competition on that one isn't too hard. So it's more about finding the right products for the right client, more than a discussion on the price. Then a question on I mean, it's very difficult, of course, to understand what kind of leads we will have in the future. And you look Yes, I heard your comments, and it's very similar to what everyone is saying. I would say that more flexibility, but Still a need to meet and so on, I fully agree. But do you think I mean, this flexibility question, do you think that It actually will increase or decrease or not affect the total need of space in the office segment. We see that the clients choose to do in a bit of different ways. But I would say that we wouldn't I don't expect the needs to go down in any way. The need would be a bit different, but I think the most of that would be that we add on quality, which is a good thing. But of course, we will see companies that choose to try to have less area, And we also see the opposite. So I think this will be a period when different companies try to figure out their best way of doing things. But we have to be aware that we are in a market that the lack of the best employees is A competition. It's a competition on that one. And then you have to offer a really good environment for your employees. And I think that's an important factor when you're also trying to figure out what our product, how that is best performed. Yes. I noticed on some releases that has come out lately, but this is Stockholm related more, I would say, that the public has been a bit keen to reduce their spaces, maybe being already on to rather large spaces. I don't know if you see any of those tendencies at all between different segments. We see different decisions. We have and sometimes it depends on if the decision is made Of the company in this area or is it made in an international perspective, So the decisions can be made in different directions, of course. But we see a bit of both. And I think we will be in a kind of test period for at least a year when companies try to figure out what they have to offer their employees to be the most attractive ones. Good afternoon, everyone. And as long as we are active and close to our tenants, we We are certain that we can provide them with what they need. Yes. And connected to that, when you look at your pipeline of projects in office space, I mean, have in the last year, have you changed any views on when to put the button to Start the project or at what level of pre rent you want to have done pre lease and so on? Have you changed your ways in any way to use that? We always have to be very close to the market, and we decide from case to case what is the right thing to do. We've decided to start with the SM5 without any signed leases, for example, because we are totally certain that, that product will be 100% right for the market, and we have no vacancy in that area. Now we started This industrial project in Helsinki World also without any signed leases, but that's also because we know that that product is very Attractive. In other cases, we have patients and wait, For example, Closed Clap and I. We would never start that project without any tenant. And even though It's 50% less, but we also have good discussions for the rest of that project. So it's really depending on the situation. And of course, in times when things are changing, you have to be even closer to the market. So we're trying to do that. Yes. Good. On the discount side for COVID, Looking ahead now, are you you have very small ones, but are they fading out now as you go into Q3 and Q4? They are fading out, yes. And then a question on your 2 projects in Malmo. I think it was 2 that you plan to have finalized in the Q4. Are those Up and running, and I think they were fully left, if I remember correctly. Are they contributing throughout the Q4? Or should I be more cautious and have them contributing in Q1 2021, first of all? It's the PRONAN II projects you're referring to, right? Yes. I think they would have finished in October, November or something. October, November, yes. So a good effect in Q4, but not 100%. Perfect. Sorry, but coming back to the rents again, there was one thing I forgot there. Again, looking at the Stockholm in the city, we get the comments that prices are held Steady and so on. But then on the other hand, we also get some comments that instead of reducing price Discussions are offered, and they could be rather long, a couple of years in some cases. Just wanted to I don't think you have the same situation Your market. So just to double check, do you see skilled prices are held up, but that you have to give more discounts To get the tenants in or is that something we see more up here? No. I would say it's the same situation as always. Sometimes you can get some discounts for before moving period, but no large discounts. Okay, perfect. Thank you. That's all for me. And the next question comes from the line of Stefan Boulow from Nordea. Please go ahead. Yes. Good morning and thank you. I have three questions, Starting off with one on the NOI margin. The NOI margin of 72% It was a bit weaker than a typical Q2 quarter. So I'm wondering if there are any particular items in the Q2 real estate costs that are elevated. You have some additional costs for heating and snow also in Q2. As we saw in Q1 as well. So that if you look at Q2 isolated, that has had a bit of an effect on the operating surplus ratio for the quarter. Okay. Thank you. Regarding net letting, are you any large Contracts affecting the net flattening figure. No. I think we have one Larger signed leases at €8,000,000 and some of €3,000,000 but the big amount is from the widespread manufacturers. So that is actually a very good trend, I think. And it's the same thing on the termination side. We have a few above I think we have EUR 2,000,000 over EUR 5,000,000, but otherwise it's very low activity on the termination side. Thank you. Okay. Thanks. And one question on the transaction Yes. Can you guide us what you see on the transaction market for offices in your market, both in terms of transaction volumes and yields Compared to pre COVID? I would say the volume is low. And I think the yield also is maybe a bit lower than before. Okay, great. That was my questions. Thank you. And we have one more question from the line of Victor Krueger from ABG. Please go ahead. Thank you. I didn't quite catch how to cancel the question stuff. I just had the first question there. So I'm good. Thank you. Thank you. And as there are no further questions, I'll hand it back for any closing remarks. Okay. Thank you, everybody, for listening in. If you have additional questions, you know where to reach us. And I'll just take the opportunity to wish you all a nice summer. This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.